INDIANAPOLIS (AP) — Managed care stocks were hammered in 2008, as higher-than-expected medical costs burned up health insurers’ profits and skittish investors wrung their hands over the companies’ potential exposure to failed investment banks.
The nation’s largest health insurers saw their stock prices fall an average of 58 percent in 2008, with Cigna Corp. shares tumbling a whopping 70 percent. The biggest U.S. players, WellPoint Inc. and UnitedHealth Group Inc., saw their stocks fall 52 percent and 54 percent, respectively.
Those declines were steeper than the 45 percent drop seen in the Dow Jones U.S. Healthcare Providers Index, a broader category that also includes hospital chains and smaller insurance companies. Managed care stocks also fell more than the 39 percent drop suffered by the S&P 500 and the 40 percent decline in the Dow Jones Total Market Index.
Insurers set themselves up for a rough 2008 by pricing premiums too low to cover medical cost outlays. That was likely a result of misreading claims data from 2007, said Dave Shove, an analyst for BMO Capital Markets.
Competition also led insurers to take risks by pricing coverage low, said Stifel Nicolaus analyst Thomas Carroll.
“Because of the desire to maintain business, I think the managed-care company was more willing to gamble with lower price increases,” he said in a recent interview.
Insurers saw higher-than-expected claims levels in areas like Medicare Advantage products, and claims processing problems forced WellPoint to cut its 2008 outlook in March. The insurer’s stock plunged 28 percent the next day, and the change rattled investors throughout the sector.
“Going into 2008, WellPoint was considered the safety stock in the group,” Carroll said. “It was like a big disconnect in the market, and I think was what triggered the violent reaction in the sector. It was the quick conclusion that, ’Gee, if WellPoint is seeing underwritng pain then it must be pervasive across the sector.”’
Wall Street also lost confidence in management, said Citi analyst Charles Boorady.
“There was a lack of trust because (they) said they were pricing at or above cost trend when they were actually pricing below cost trend,” he said.
And by early summer, Stifel’s Carroll had started hearing concerns about insurance investment portfolios. People worried about health insurers’ exposure to troubled companies like Lehman Brothers. Investors grew nervous that insurers would have to raise money by issuing stock or diving into expensive debt markets for capital due to investment hits.
“As a result you had investors absoutely staying away from the group,” he said. “In reality, it turned out to be about 1 1/2 to 2 percent of investment portfolios were exposed to what we would call questionable investments.”
Humana, for example, recorded a loss of $108.3 million in its third quarter due to a downturn in the company’s investment and securities lending porfolios and the sale of distressed financial institution securities. While the loss hurt quarterly results, it was just a fraction of Humana’s more than $6 billion investment portfolio.
The outcome of the presidential election also hung a question mark over health insurance stocks, as the specter of a national health care plan that might drain insurers’ pricing power loomed.
Despite the rough year, analysts think health insurers can rebound in 2009. BMO Capital’s Shove noted that the pricing miss is something insurers can correct.
For his part, Carroll feels the industry bottomed out in 2008. He noted that earnings expectations will be low heading into the new year, and a still-ailing market may view managed care “as a place of outperformance.”
“I tend to think that the managed care group in 2009 is going to be a good bet,” Carroll said.
However, managed-care companies can expect to lose business as large corporations cut jobs in a slow economy, reducing health insurance membership. Standard & Poor’s lowered its credit outlook for U.S. health insurers to negative from stable last month due to slowing growth prospects and a weaker 2009 economic forecast.
On the other hand, some say the weak economy will prompt many people to cut down on doctors’ visits and delay medical procedures, which would keep health insurers’ costs down and help their profit margins.